When Asian Tycoons Beat Donald Trump

November 9, 2016 | Peter Churchouse

In late September, a true lion of Asian business died after a long illness. He was 91 years old.

Typical of many Chinese billionaires, his success came from humble beginnings. He started in the jewelry business in Macau in the late 1930’s. He later inherited the family business and grew it substantially.

From there he moved, like so many of his generation, into property in Hong Kong in the 1960’s.

Forget diamonds and gold… real estate is where real money was made.

Cheng Yu-tung was a highly regarded businessman who extended his reach beyond property and jewelry into various forms of infrastructure, retail, and hotels.

Having watched and followed his core company, New World Development (17 HK, US$10.5 bn market cap), and jewelry company Chow Tai Fook (1929 HK, US$7.6bn market cap) for more than thirty years.

In my investment banking days, I was part of the team that took New World’s China property business public. It was one of the earlier China property sector IPO’s.

New World was a pioneer, showing how foreign companies could take on China’s fledgling property markets in a big way.

Asian property investors and developers have often struggled when entering foreign markets, but one example of a ‘win’ involved the Cheng family and a fellow Hong Kong tycoon, Vincent Lo of Shui On Land (272 HK)… and as it would happen, Donald Trump.

This particular deal initially dates back to the 1970’s. But it really took shape in the mid-1980’s. It involved the Manhattan West Side Yards, a 77-acre site on Manhattan’s west side.

The owners went into bankruptcy and the site fell into the hands of banks. Trump’s part in this began in 1985 when he acquired the Yards from another distressed developer for US$115 million.

But of course, as we have seen from Trump’s frequent incursions into bankruptcy and financial distress, it was only a matter of time before this asset would fall into the “distressed” bucket again.

It duly did so…

In the early 1990’s, the site, under Trump’s control, was bleeding cash like a stuck pig. The New York property market was undergoing a correction at the time which didn’t help.
Trump’s bankers forced him to relinquish control of the site.

The new owners? Yes, you guessed it. The Cheng family of New World fame in Hong Kong and Vincent Lo another property tycoon with big real estate interests in Hong Kong and China.

In 1994 they paid US$82 million, and assumed the roughly US$250 million debt that the Donald had accumulated.

The new owners set about developing the site with up-market condos and other uses. Trump was entitled to a share of the profits from property sales and took management and construction fees during the build.

His interest in the development post-sale was reportedly 30%.

Come 2005, the Hong Kong team agreed to sell the development for around US$1.76 billion.

And that’s when the fun started. Trump screamed blue murder.

This, as so often seems to be the case with America’s possible new President, ended up in the courts.

Trump tried to sue the pants off the Hong Kong partners. His argument? They should never have sold it for that price. It was worth much more he said.

He refused to accept his share of the proceeds of the sale.

Over the next four years the case dragged on, producing 166,000 pages of documents for the court.

Trump accused his Hong Kong ‘partners’ of all sorts of infringements… from tax evasion to fraud.

He lost.

His compensation was a minority interest in the New York and San Francisco Bank of America Buildings (which are worth around US$640 million today according to Bloomberg).

He now of course trumpets that this was a great deal that he won! One of those times he “beat China”…

The Hong Kong group won their case in court but at great expense and great effort.

Recently, referring to the Trump litigation, Vincent Lo was quoted as remarking, “Well, that is him. To file a lawsuit is nothing. It’s just like having lunch”.

Probably not too many people outside of Hong Kong followed this story.

But it does, once again, serve to illustrate something of the character of the man who could be the next President of the U.S.

[I also spoke to a wealthy European family office earlier this year who had done business with Trump and reported that the experience turned unpleasant.]

This deal though shows that at least some investors from Asia have faced the notorious court process in the U.S. and won.

And it also demonstrates the importance of retaining control over investments where possible.

Trump was a minority shareholder in the project and couldn’t drive it as he wanted. Despite having his name on the buildings, he was a passenger.

Fourth, I have long opined that Asian real estate investors are not adept at investing outside their home markets. This story is a good example of me being wrong… although the Hong Kong partners sure had to work hard for their win!

In the next 24 hours there’s a good chance we’ll know the name of the next President of the United States.

But there’s one particular sector of the economy that stands to benefit regardless of who wins…

Why?

Because BOTH of these candidates have pledged to increase spending in this sector massively … and we outlined a simple investment to take advantage of this in a recent edition of The Churchouse Letter…

About Peter Churchouse

Peter Churchouse spent decades in Hong Kong as the head of Asia Research and Regional Strategist at Morgan Stanley, one of the world’s top investment banks, and as a real estate investor. He is the editor of The Churchouse Letter.

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